One prime contractor is growing its own startups with promising technology

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The government’s need for fresh technologies and innovation is rippled throughout its supply base. An emerging trend has prime contractors accelerating their investments in promising startups. A case in point is a $100 million fund established by Booz Allen Hamilton. For its aims and how it works, we turn to Booz Allen’s Vice President for Tech Scouting and Ventures Brian MacCarthy. He talked to the Federal Drive with Tom Temin.

Interview transcript:

Tom Temin: And is this venture firm that you have established, I wish I had that much cash laying around, is it to be modeled similar to the classic venture capital firm you might find in the West Coast?

Brian MacCarthy: Yes, and I think with a little bit of a twist, so it is a corporate venture firm. And by that it’ll be a wholly owned subsidiary of Booz Allen. There are no other investors in this fund. The capital for the fund is coming off our balance sheet. One major clarification, traditional VC is really hyper focused on getting the best technologies out there into the hands of consumers and other bases. This particular fund is going to be hyper focused on public sector, and it will be a Strategic Fund versus only financial. And by that, I mean, we are hoping to pull some strategic value out of the companies that we find and ultimately invest in.

Tom Temin: And when you say strategic value, what does that mean exactly?

Brian MacCarthy: Yeah, I think it means a couple of things. One, we know that the public sector, this has been covered widely by you guys, and by several other outlets that track our industry. But it’s widely been accepted that the public sector and DoD and national security missions need access to commercial and blue use tech to speed time to market right. And with that in mind, from a value perspective, our clients are asking us every single day on some of the most important missions that we serve, how can you go and find and access some of the best commercial tech out there. So for us, the strategic value is spending a lot of time finding, vetting, kicking the tires on some of this tech, and then exposing them into our channels, i.e. bringing them to the forefront of some of the most difficult public sector missions and getting them to our clients. It also means that we may address and open new markets and channels for us. So you know, an example of that might be, could it possibly open up a new channel in quantum or immersive, or counter UAS? Right, things that we may not develop, necessarily in house. We have capabilities like that in house. But could we find companies and startups that are fast tracked and poised to do very well in those areas?

Tom Temin: You mentioned dual use. So then the presumption is these companies may already have a technology that has commercial application, and your job will be to make an investment that will help them reach the federal market.

Brian MacCarthy: That’s exactly right. So one of the things that we’re going to be looking for, we use a tech scouting division that is predominantly located in San Francisco and in Austin, and in Washington, D.C., we have about 25, full time scouts, we’ll use that as the ingest for finding some of these companies. And I think a good marker, one of the first things that we’re going to look at is do some of these companies, number one, already have a product, right? We’re not looking for a pitch deck necessarily, but do they have a product? And can it be used right now? Right? Because that’s what our clients are asking of us. And if it’s already being used in the commercial market, can we tweak? And can we, you know, bring a use case from the public sector for that particular product? That’s really kind of what we mean by dual use.

Tom Temin: We’re speaking with Brian MacCarthy, he’s vice president for Tech Scouting and Ventures at Booz Allen Hamilton. And in investing in them, will you also invest in, I guess, the people side of it? Because very often, these companies are just totally green, when it comes to the intricacies of even getting a federal contract, or will you simply use them as subcontractors?

Brian MacCarthy: Yeah, I think there’s probably a mix of both. So we are going to be taking minority equity investments in the company. In that but through kind of a strategic lens, we’re going to help them do a lot of different things. One is to expose them to new markets and channels via Booz Allen contracts. Number two, we’re going to absolutely expose them to our client base where they may not have direct access otherwise, but there’s also lots of other things specific to the federal market, right? So one may be do they need facility clearances? Do they have a problem getting facility clearances, and could Booz Allen help sponsor them? Anybody who’s building SaaS applications in the cloud knows how hard it is to get the federal certifications to be used on prem, right. So that’s another thing that we can help with. So our kind of core engineering expertise, we’re absolutely going to bring that to the table. And in some very, I wouldn’t say rare instances, but one of the things that we are going to absolutely look for is, could we take this product, this SAAS product, which this is primarily what we’re talking about here, could we ingest it into our own R&D pipeline as well?

Tom Temin: And what if one of the companies got the investment and they were on their way, and they were comfortable with federal? What if they sub with Deloitte?

Brian MacCarthy: No problem.

Tom Temin: All right, any early examples of the types of companies you may have already been pursuing?

Brian MacCarthy: Yeah, so we were stealth for the last year. We’ve actually already made three investments and, per your last question, it’s pretty cool, right? So one of the things that is different in the investment game is it really is a team sport. So one of the early companies we invested in actually, our first one was a company called latent AI. They are basically an edge AI company where they develop tools that enable us to deploy algorithms to low compute and low power environments. So perfect for soldiers. Another investor in that company was Lockheed Martin ventures. And we actually exchanged diligence and findings on whether that company could be good for both of us, right? So yeah, I think that’s an early example. And we are already pulling them on to an army contract. So we’ve, in terms of the partnership there, I think it’s been fantastic so far.

Tom Temin: Right because if they sub to Booz Allen, then you get the ability to get closer to a federal contract win. And if they partner with Lockheed or someone else, some other competitor, then you win because you’re invested in them, and they’ll get the revenue that way.

Brian MacCarthy: That’s true. And I think even more so in thinking about like the strategic imperative, really, with respect to great power competition, whether it’s Lockheed, whether it’s L3, whether it’s Raytheon, some of these other folks have venture arms, we all need to be playing this sport. And there’s no other way to say it. The DoD just announced $100 million of their own money to bridge what they call the “valley of death,” right, for startups. And we know our adversaries are really going after some of these markets, particularly in quantum, particularly in micro electronics, particularly in AI and 5G. So we’ve got to bring trusted sources of capital to the startup community, and really emphasize why working with the public sector is good for their business. So it’s been really nice to see a lot of startups and founders be really bullish on working with the public sector.

Tom Temin: And in some way that makes sure that these types of promising companies keep away from, say, Chinese capital, which is not an unknown phenomenon.

Brian MacCarthy: Well, that’s exactly right. And I think it’s been a major concern, it continues to be a major concern. There was a big Wall Street Journal article. I know that the SASC [Senate Armed Services Committee] is very worried about this, as well as top level officials in the Pentagon. So one of the things that we have to do in even all of our business cases, is really look at their cap table with respect to foreign investment. So that is part of the process in which we look at prior to making an investment in firm.

Tom Temin: And a final question, who makes the investment decision? Is that you alone? Or do you have a board there at Booz Allen that looks at these companies?

Brian MacCarthy: Yeah, we have a five member Investment Committee. So my team who operates the fun brings up the business cases and we work with four business units, where we’re focused on AI, cyber, deep tech, and kind of all things c5isr [Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance and Reconnaissance]. Those business cases go up in front of a five-member board of which I’m a member of, and then we have folks from our CTO office, our corporate development office, and others, and it goes to a five-person vote.

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